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What's behind the façade?

29-06-2016 | Insight | Willem Schramade

Many asset managers claim to do ESG integration. But do they really? It can be a tough call, as the marketing is often stronger than the execution; scores and ratings tell only part of the story; and the confusion over concepts makes it even harder. Here are four questions that can help you get behind the façade.

Speed read
  • Many asset managers claim to be sustainable
  • However, sometimes it’s more marketing than reality
  • Here are four types of questions to find out how serious your asset manager is about ESG

1.  Why does the asset manager integrate ESG?
What’s the conviction behind a fund’s ESG integration? In the absence of a direct answer, try to get a sense of whether it is aimed at better decision making, better risk assessment, better insight into what they own, taking responsibility, or simply pleasing customers. Of course, a poor answer is telling, but also treat a strong answer with extreme caution: it’s easy to spin a good story about lofty ambitions. It’s harder to put them into practice. So dive deeper. What do they really do? How do they do it?

2. What's the approach?
Most asset managers will have a ready-made answer. But again, the key is to go deeper. At the fund level, typical follow-up questions are:

  • At what stages of the investment process do you find ESG integration most important?
  • What role does materiality play in your assessment of ESG issues?
  • Do you think ESG is about risk only, or upside too? If it is the latter, can you show examples of ESG affecting upside?


Taking it to the group level, you might ask:

  • How do your integration approaches differ across and within asset classes? What’s the common thread? How is the approach adapted to investment needs?
  • How do fundamental and quant-driven approaches to ESG integration complement each other?

3. How does it affect decision making and portfolios?
This question is typically answered by referring to the portfolio’s average sustainability scores and sector exposures. But that’s too easy. First of all, scores do not provide the complete picture. Second, it doesn’t mean that decision making is affected in all stages of the investment process. You should therefore ask questions like:

  • Can they show their logbook?
  • How does ESG analysis affect the analysts’ opinion on industry attractiveness, valuation assumptions and recommendations? What value drivers do they adjust, and how?
  • Do they engage on their holdings? If yes, how and on how many? What are the criteria? Does engagement start before or after investing?


4. How have they experienced ESG integration?
In my experience, the killer questions in distinguishing the really advanced players from the mere marketing facades are the ones that dig into the asset manager’s experience, such as:

  • How long did it take to get seriously ESG integrated? What were the key incentives and impediments? What were the milestones and key events that boosted adoption? What swayed skeptics? What was the role of top management in driving ESG integration?
  • What themes and material ESG issues show up most often in your investment cases? Do you have examples of ESG risks or opportunities materializing much faster than you anticipated?
  • What do your analysts feel about the quality of ESG analysis and information delivered by brokers, ratings agencies, and corporates?

And no, don’t believe them if they say they did not have any problems.
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